Option Strategy for Fixed Monthly Income
Option Strategy for Fixed Monthly Income is a topic that all investors are interested in, I hope you also want to know this special trick to earn money without taking much risk.
Below strategies are applicable to all traders in all stock markets, especially US Stocks, UK Stock market, Indian Stock markets it is much popular.
There are various options strategies that can help you generate income from the market, depending on your risk appetite, capital availability, and market outlook.
Here are some of the most popular ones:
Covered Calls Option strategy: This is a strategy where you sell call options on stocks that you own and collect the premium as income. You limit your upside potential on the stock, but you also reduce your downside risk by the amount of premium received. This strategy works best when the stock is stable or slightly bullish.
A covered call option strategy is a way of generating income from a stock that you own, by selling a call option on it. A call option gives the buyer the right to buy the stock from you at a fixed price (the strike price) before a certain date (the expiration date). You receive a premium (the price of the option) for selling the call option, and you keep it regardless of what happens to the stock price.
Here is an example of how a covered call option strategy works:
Suppose you own 100 shares of APPLE stock, which is trading at $50 per share.
You sell one call option on APPLE with a strike price of $55 and an expiration date of one month later. You receive $2 per share as the premium, or $200 in total.
If APPLE stays below $55 until the expiration date, the call option expires worthless, and you keep the premium and your shares. Your profit is $200, or 4% of your initial investment of $5,000.
If APPLE rises above $55 before or on the expiration date, the call option buyer can exercise the option and buy your shares for $55 each. You must sell your shares for $55, even if the market price is higher. Your profit is $700, or 14% of your initial investment. This is calculated as ($55 - $50) x 100 + $200.
If APPLE falls below $50, you lose money on your shares, but you keep the premium. The premium reduces your breakeven point from $50 to $48. Your loss is limited by the premium received.
Some of the pros and cons of using a covered call option strategy are:
Pros:
It generates income from your stock holdings in a flat or slightly rising market.
It lowers your cost basis and breakeven point on your stock position.
It provides some downside protection in case the stock price falls.
Cons:
It limits your upside potential if the stock price rises significantly above the strike price.
It exposes you to the risk of losing your shares if the stock price rises above the strike price and the option is exercised.
It requires you to monitor the stock price and the option price until expiration or close the position early.
A covered call option strategy can be a useful way of enhancing your returns and reducing your risk on a stock that you own, but it also involves trade-offs and requires careful planning. You should consider factors such as your outlook on the stock, your risk tolerance, and your income goals before using this strategy. You should also be aware of the tax implications and margin requirements involved in selling options.
Cash Secured Puts Option strategy: This is a strategy where you sell put options on stocks that you want to buy and set aside enough cash to buy them if they fall below the strike price. You collect the premium as income, and you either keep the cash if the stock stays above the strike price or buy the stock at a discount if it falls below it. This strategy works best when the stock is stable or slightly bearish.
A cash-secured put option strategy is a way of generating income from a stock that you want to buy, by selling a put option on it. A put option gives the buyer the right to sell the stock to you at a fixed price (the strike price) before a certain date (the expiration date). You receive a premium (the price of the option) for selling the put option, and you set aside enough cash to buy the stock if the option is exercised.
Here are some examples of how a cash-secured put option strategy works with different stocks:
Let's understand with a US Stock example:
Suppose you want to buy 100 shares of Microsoft (MSFT), which is trading at $300 per share, but you think it is too expensive now.
You sell one put option on MSFT with a strike price of $280 and an expiration date of one month later. You receive $5 per share as the premium, or $500 in total.
You also set aside $28,000 in cash as collateral in case you must buy the stock at $280 per share.
If MSFT stays above $280 until the expiration date, the put option expires worthless, and you keep the premium and your cash. Your profit is $500, or 1.8% of your collateral.
If MSFT falls below $280 before or on the expiration date, the put option buyer can exercise the option and sell you the stock for $280 each. You must buy the stock for $280, even if the market price is lower. Your cost basis is $275, thanks to the premium received. This is 8.3% below the current market price and your desired buy price.
Suppose you want to buy 100 shares of Tesla (TSLA), which is trading at $800 per share, but you are not sure if it will go up or down in the next month.
You sell one put option on TSLA with a strike price of $750 and an expiration date of one month later. You receive $20 per share as the premium, or $2,000 in total.
You also set aside $75,000 in cash as collateral in case you have to buy the stock at $750 per share.
If TSLA stays above $750 until the expiration date, the put option expires worthless, and you keep the premium and your cash. Your profit is $2,000, or 2.7% of your collateral.
If TSLA falls below $750 before or on the expiration date, the put option buyer can exercise the option and sell you the stock for $750 each. You must buy the stock for $750, even if the market price is lower. Your cost basic is $730, thanks to the premium received. This is 8.8% below the current market price and your desired buy price.
Some of the pros and cons of using a cash-secured put option strategy are:
Pros:
It generates income from your idle cash while waiting to buy the stock at your desired price.
It lowers your effective purchase price of the stock as you collect premiums.
It allows you to buy the stock at a discount if it falls below the strike price.
Cons:
It ties up your cash as collateral until the option expires or is closed.
It exposes you to the risk of buying a declining stock if the market price falls significantly below the strike price.
It limits your upside potential if the stock price rises above the strike.
Protective Collar Option strategy: This is a strategy where you buy a put option and sell a call option on a stock that you own, creating a range of prices where you are protected from losses and capped from gains. You pay a net premium for this strategy, but you can reduce or eliminate it by choosing different strike prices. This strategy works best when you want to hedge your existing position against a large downside move.
A protective collar option strategy is a way of hedging against large losses on a stock that you own, by buying a put option and selling a call option on it. A put option gives you the right to sell the stock at a fixed price (the strike price) before a certain date (the expiration date). A call option gives the buyer the right to buy the stock from you at a fixed price before a certain date. You pay a net premium (the difference between the prices of the options) for buying the put option and selling the call option.
Here is an example of how a protective collar option strategy works:
Suppose you own 100 shares of APPLE stock, which is trading at $50 per share, and you are bullish on it in the long term, but you are worried about a short-term downturn.
You buy one put option on APPLE with a strike price of $45 and an expiration date of one month later. You pay $2 per share as the premium, or $200 in total.
You also sell one call option on APPLE with a strike price of $55 and an expiration date of one month later. You receive $1 per share as the premium, or $100 in total.
Your net premium is $100 ($200 - $100), which is your maximum loss if APPLE stays between $45 and $55 until the expiration date.
If APPLE falls below $45 before or on the expiration date, the put option gives you the right to sell your shares for $45 each, limiting your loss to $5 per share, plus the net premium paid. Your maximum loss is $600 ($500 + $100).
If APPLE rises above $55 before or on the expiration date, the call option buyer can exercise the option and buy your shares for $55 each, capping your gain to $5 per share, minus the net premium paid. Your maximum gain is $400 ($500 - $100).
Some of the pros and cons of using a protective collar option strategy are:
Pros:
It protects your downside risk below the put strike price, in case of a large drop in the stock price.
It reduces or eliminates the net premium cost by selling a call option.
It allows you to participate in some upside potential up to the call strike price.
Cons:
It limits your upside potential above the call strike price, in case of a large rise in the stock price.
It requires you to monitor the stock price and the option prices until expiration or close the position early.
It may trigger tax consequences if the call option is exercised, and your shares are called away.
Call Credit Spread Option strategy:
A call credit spread option strategy is a way of generating income from a stock that you are bearish on, by selling a call option and buying another call option on it. A call option gives the buyer the right to buy the stock at a fixed price (the strike price) before a certain date (the expiration date). You receive a net premium (the difference between the prices of the options) for selling the call option and buying the other call option.
Here is an example of how a call credit spread option strategy works:
Suppose you are bearish on TESLA stock, which is trading at $50 per share, and you expect it to stay below $55 in the next month.
You sell one call option on TESLA with a strike price of $52.50 and an expiration date of one month later. You receive $3 per share as the premium, or $300 in total.
You also buy one call option on TESLA with a strike price of $55 and an expiration date of one month later. You pay $1 per share as the premium, or $100 in total.
Your net premium is $200 ($300 - $100), which is your maximum profit if TESLA stays below $52.50 until the expiration date.
If TESLA rises above $52.50 before or on the expiration date, the call option that you sold will be in-the-money, and you will have to pay the difference between the stock price and the strike price. Your loss will be offset by the call option that you bought, which will also be in-the-money. Your maximum loss is $300, which occurs when TESLA is at or above $55.
Some of the pros and cons of using a call credit spread option strategy are:
Pros:
It generates income from your bearish view on the stock, if it stays below the lower strike price.
It reduces your risk compared to selling a naked call, as you have a hedge in case the stock rises above the higher strike price.
It benefits from time decay, as both options lose value as they approach expiration.
Cons:
It limits your profit potential to the net premium received, even if the stock falls significantly below the lower strike price.
It requires you to monitor the stock price and the option prices until expiration or close the position early.
It may trigger tax consequences if the call option that you sold is exercised and your shares are called away.
Put Credit Spread Option strategy: In this post, I'm going to explain what a put credit spread option strategy is and how you can use it with Tesla stock. I'll also list some of the pros and cons of this strategy, so you can decide if it's right for you. Let's get started!
A put credit spread option strategy is a type of bullish option strategy that involves selling a put option and buying another put option with a lower strike price on the same underlying asset and expiration date. The idea is that you collect a premium from selling the higher-strike put option and use part of it to buy the lower-strike put option, creating a net credit in your account. You want the underlying asset price to stay above the higher-strike price until expiration, so both options expire worthless, and you keep the credit as profit.
For example, let's say Tesla stock is trading at $800 per share on July 1st, 2023. You think Tesla is going to stay above $750 until July 31st, 2023, so you sell a $750 put option for $10 and buy a $700 put option for $5, creating a net credit of $5 per share or $500 per contract (since each contract represents 100 shares). Your maximum profit is the credit you received, which is $500 per contract. Your maximum loss is the difference between the strike prices minus the credit, which is ($750 - $700 - $5) x 100 = $4500 per contract. Your break-even point is the higher-strike price minus the credit, which is $750 - $5 = $745 per share.
Here are some of the pros and cons of using a put credit spread option strategy:
Pros:
- You can profit from a bullish or neutral outlook on the underlying asset.
- You can reduce your risk by buying a lower-strike put option to hedge against a large drop in the underlying asset price.
- You can benefit from time decay, as both options lose value as they approach expiration.
Cons:
- You have a limited profit potential, as your maximum profit is capped by the credit you received.
- You have a higher risk than reward ratio, as your maximum loss is larger than your maximum profit.
- You are exposed to assignment risk, as the seller of the higher-strike put option may be forced to buy the underlying asset at the strike price if it falls below, it before expiration.
As you can see, a put credit spread option strategy can be a useful way to generate income from a bullish or neutral outlook on an underlying asset, such as Tesla stock. However, you should also be aware of the risks and limitations of this strategy and use it with caution and proper risk management. I hope you found this blog post helpful and informative.
Straddle Option strategy: This is a strategy where you buy a call option and a put option with the same strike price and expiration date on an underlying asset. You pay a net premium for this strategy, and you profit if the asset moves significantly in either direction. Your risk is limited to the net premium paid. This strategy works best when you expect high volatility in the asset.
This blog explain what a straddle option strategy is and how you can use it with Google stock. A straddle option strategy is a way of betting on the volatility of a stock, rather than its direction. It involves buying both a call and a put option with the same strike price and expiration date. A call option gives you the right to buy the stock at a certain price, while a put option gives you the right to sell it at a certain price.
Let's say you think that Google stock is going to move a lot in the next month, but you're not sure if it will go up or down. You can buy a straddle option with a strike price of $2800 and an expiration date of August 14, 2023. This means you pay a premium to buy both a call and a put option with these terms. The premium is the cost of the option, and it depends on factors like the volatility and time to expiration.
If Google stock moves above $2800 by August 14, 2023, you can exercise your call option and buy 100 shares of Google at $2800 each. You can then sell them at the market price and make a profit. If Google stock moves below $2800 by August 14, 2023, you can exercise your put option and sell 100 shares of Google at $2800 each. You can then buy them back at the market price and make a profit. If Google stock stays close to $2800 by August 14, 2023, you can let both options expire worthless and lose the premium you paid.
Here are some pros and cons of using a straddle option strategy:
- Pros:
- You can profit from large price movements in either direction.
- You don't need to predict the direction of the stock.
- You can benefit from increased volatility in the market.
- Cons:
- You need a large price movement to overcome the premium you paid.
- You lose the premium if the stock stays near the strike price.
- You face time decay as the options get closer to expiration.
I hope this blog post helped you understand what a straddle option strategy is and how you can use it with Google stock. If you have any questions or comments, please leave a comment below. I do respond very fast.
Strangle Option strategy:
Strangle Option Strategy Explained in simple language :
If you are looking for a way to profit from a big move in the stock market, you might want to consider a strangle option strategy. A strangle is a type of option trade that involves buying both a call and a put option on the same underlying stock with the same expiration date, but with different strike prices. The idea is to capture the profit from a large price movement in either direction, without having to predict which way the stock will go.
For example, let's say you are interested in trading NVidia (NVDA), a leading chipmaker company that is known for its volatility. The stock is currently trading at $200 per share, and you expect it to make a big move soon, but you are not sure if it will go up or down. You decide to buy a strangle option strategy that consists of:
- Buying one call option with a strike price of $210 and an expiration date of one month from now. This option gives you the right to buy 100 shares of NVDA at $210 per share, regardless of the market price, until the expiration date. The call option costs $5 per share, or $500 in total.
- Buying one put option with a strike price of $190 and an expiration date of one month from now. This option gives you the right to sell 100 shares of NVDA at $190 per share, regardless of the market price, until the expiration date. The put option costs $4 per share, or $400 in total.
The total cost of the strangle option strategy is $900 ($500 + $400), which is also the maximum loss you can incur if the stock price stays between $190 and $210 by the expiration date. In that case, both options will expire worthless, and you will lose your initial investment.
However, if the stock price moves significantly above or below the strike prices, you can make a profit by exercising one of the options and selling the other one. For example:
- If the stock price rises to $230 by the expiration date, you can exercise your call option and buy 100 shares of NVDA at $210 per share, then sell them at $230 per share, making a profit of $20 per share, or $2,000 in total. You can also sell your put option before it expires, but it will have little value since it is out of the money. Your net profit will be $2,000 - $900 = $1,100.
- If the stock price drops to $170 by the expiration date, you can exercise your put option and sell 100 shares of NVDA at $190 per share, then buy them back at $170 per share, making a profit of $20 per share, or $2,000 in total. You can also sell your call option before it expires, but it will have little value since it is out of the money. Your net profit will be $2,000 - $900 = $1,100.
As you can see, the strangle option strategy allows you to profit from a large price movement in either direction, if it exceeds the total cost of the options. However, there are also some drawbacks and risks associated with this strategy:
- You need a large price movement to break even and make a profit. In this example, the stock price needs to move more than 10% in either direction to cover the cost of the options. If the stock price stays within a narrow range or moves slightly in either direction, you will lose money.
- You have limited time for the stock price to move. Since options have an expiration date, you need the stock price to move before that date. Otherwise, your options will lose value over time due to time decay and eventually expire worthless.
- You are exposed to implied volatility risk. Implied volatility is a measure of how much the market expects the stock price to fluctuate in the future. It affects the price of options and can change unpredictably due to various factors such as earnings reports, news events, market sentiment, etc. If implied volatility decreases after you buy your options, your options will lose value even if the stock price does not change. Conversely, if implied volatility increases after you buy your options, your options will gain value even if the stock price does not change.
To summarize, a strangle option strategy is a way to profit from a large price movement in either direction without having to predict which way the stock will go. However, it also involves high costs and risks that require careful analysis and management.
These are some of the options strategies that can help you generate monthly income from the market. However, you should be aware of the risks involved in each strategy and use proper risk management techniques to protect your capital. You should also do your own research and analysis before entering any trade and consult a professional financial advisor if needed.
I hope this information was helpful to you. If you have any questions or feedback, please let me know in comment below.
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